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Regional Comprehensive Economic Partnership

Over the last few years, Japan’s foreign policy gained a coherence rarely seen in decades. No doubt pressure from Japan’s natural rivals in Asia—a rising China and a recalcitrant Russia—have helped to focus the minds of Japanese policymakers. Certainly those closest to Japanese Prime Minister Shinzō Abe seemed convinced that Japan needed to improve its security situation. By the beginning of 2016, it seemed as though Japan had done just that.

A Firmer Footing

While President Barack Obama’s “pivot to Asia” proved disappointing, Japanese policymakers saw value in Obama’s support for a “rules-based international order.” In practical terms, what that meant was that Japan could at least count on the United States to remain engaged in Asia and underpin its security. For much of 2016, that seemed likely to continue. After all, Obama’s nominal successor, Hillary Clinton, led in the U.S. presidential election polls. Though Clinton had renounced her earlier support for the Trans-Pacific Partnership (TPP), a free-trade agreement that Japan hoped would be the basis of Asia’s future economic architecture, most observers expected her to reverse herself again if she became president.

Hence, Abe had every reason to believe that his efforts to improve Japan’s security would be built on a reasonably solid foundation. He tirelessly traveled throughout Asia cultivating new friendships, especially with the countries in Southeast Asia. He encouraged Japanese companies to invest in them; he forged security relationships with them; and he even gave some of them Japanese-built patrol boats to monitor their maritime borders. He also stepped in when Washington stumbled. After relations between the United States and its long-time allies, Thailand and the Philippines, soured over their internal affairs, Abe quickly moved to strengthen Japan’s bilateral ties with both countries.

Japan also took more direct steps to strengthen its defense posture. It modestly increased its defense budget. It also laid the groundwork for new military installations in the Ryukyu Islands to watch over its East China Sea claims. But possibly Japan’s biggest step was its new interpretation of its self-defense law. Under the new guidelines, Japan’s Self-Defense Forces would be allowed to aid allies who come under attack. While that may seem wholly non-controversial in most countries, it was anything but in pacifist Japan. Some feared that Japan could be more easily drawn into future conflicts. But the new guidelines would also enable Japan to form stronger security alliances that could prevent such conflicts from happening at all.

The string of good news for Japan’s security reached its zenith last July. Under the auspices of the United Nations, the Permanent Court of Arbitration gave a boost to the “rules-based international order” when it judged that China’s “nine-dash line” claim in the South China Sea to be invalid. With the judgment an international court at its back, a heartened Tokyo even considered filing its own case against China over their competing territorial claims in the East China Sea.

Shifting Sands

However, just then the ground beneath Japan’s feet shifted. Rodrigo Duterte’s election as the president of the Philippines abruptly ended what some saw as Southeast Asia’s growing willingness to back an international order based on rules (or at least on ASEAN’s norms). Having a personal animosity towards Obama and a general suspicion of American meddling, Duterte steadily moved the Philippines away from the United States. Instead, he leaned toward China. Abe’s meeting with Duterte in Tokyo failed to arrest that tilt. Soon after, Malaysian Prime Minister Najib Razak, for his own reasons, began to lean the same way. He even agreed to buy Chinese ships for the Malaysian navy. On the other hand, Japan missed a golden opportunity to solidify its security relationship with Australia when a Japanese consortium lost a bid to build Australia’s next generation of submarines.

To top it all off, Donald Trump won the U.S. presidential election. Throughout his campaign, he bashed not only the TPP, but also Japan for what he viewed as its inadequate support for the U.S. security presence in Asia. Soon after his election, Trump confirmed that he would shelve the TPP when he became president. Doubtlessly concerned, Abe hastily flew to New York to impress upon Trump the importance of a strong alliance between Japan and the United States. But Abe received no public assurances. The best news that Abe received from Trump probably came a month later when he announced his aim to expand the U.S. Navy. If fully realized, that would at least put more substance behind America’s commitments to Asia (and to Japan), however strong they may be.

Troublesome Neighbors

China quickly capitalized on Japan’s reverses. Given the likely demise of the TPP, China pushed harder for a Chinese-led free-trade pact, the Regional Comprehensive Economic Partnership, at the APEC summit last November. Many believe the pact, if successful, would draw Asia’s economies closer into China’s orbit.

Russia also sensed Japan’s weakened position. When Russian President Vladimir Putin met with Abe a month later, he offered Abe nothing new when they discussed how to settle their dispute over the southern Kuril Islands (or Northern Territories in Japan). Putin simply reiterated Russia’s historic positions and insisted that any joint economic development on the islands must take place under Russian rules, an implicit recognition of Russian sovereignty over the islands. Unsurprisingly, the meeting yielded little progress.

The Going Remains Tough

To make matters worse, Japan has yet to break free from a quarter century of economic stagnation. Unless that changes, Japan will be hard pressed to devote substantially more resources to its security. Through the TPP, Abe probably hoped to not only give Japan an economic boost, but also bind the United States more closely to Asia. Unfortunately for Abe, the TPP’s negotiations dragged on for too long. By the time they ended, it was politically impossible for the U.S. Senate to ratify it. Even so, Abe has vowed to push TPP legislation through the Japanese Diet.

None of this is to say that Japanese policymakers have lost their way. Abe is still focused on improving Japan’s security situation. But for the moment, how much more he can do about it is not altogether clear.

Countries Involved in the Regional Comprehensive Economic Partnership and the Trans-Pacific Partnership

The Regional Comprehensive Economic Partnership (RCEP) and the Trans-Pacific Partnership (TPP) are both free-trade agreements in Asia that have been under negotiation for a number of years. Often seen as competitors, however, the former is led by China and the latter by the United States. By February 2016, the RCEP had fallen behind the TPP, whose negotiators had already signed an agreement and returned it to their twelve member countries for ratification. Their RCEP counterparts were still mired in talks.

Even so, the TPP’s negotiations were by no means a cake walk. Concerns in Japan over agricultural issues and in Southeast Asia over the TPP’s “deep” standards repeatedly delayed an agreement. Indeed, there had been too many delays. By the time a deal was reached, the United States, the pact’s biggest member, had begun what turned out to be a particularly bitter presidential election and one in which the TPP became a lightning-rod issue. Even the pact’s early advocates, like former Secretary of State Hillary Clinton, who was one of the presidential candidates, strongly disavowed it. In such a political climate there was little chance the U.S. Senate would ratify it.

The election of Donald Trump as the next American president sealed the fate of the TPP in the United States. Soon after, President Barack Obama abandoned his efforts to ratify the pact. Trump himself declared that the United States would withdraw from it after he is sworn in as president. That threw the future of the TPP into turmoil. It also breathed new life into the RCEP. Capitalizing on the TPP’s disarray, Chinese President Xi Jinping reassured participants at the Asia Pacific Economic Cooperation summit in late November that China would renew its efforts to conclude the RCEP.

RCEP vs. TPP

Why does that matter? What, apart from some of their member countries, is the difference between the two free-trade agreements? Traditionally, countries conclude free-trade agreements to lower or eliminate tariffs, and thus encourage trade. While that has generally spurred economic growth in developing countries, it has also tended to hollow out legacy industries in developed countries.

Consequently, developed countries, like the United States, have sought a new approach to free trade. Embodied in the TPP (and its sister free-trade agreement, the Transatlantic Trade and Investment Partnership), that approach requires member countries to adopt domestic policies that would “raise labor and environmental standards, impose disciplines on government-owned corporations, strengthen intellectual property rights enforcement, [and] maintain a free and open internet.”[1] In that way, developed countries argue, trade would be not only freer, but fairer too. Indeed, some in the Obama administration even saw the TPP as part of a grander vision for a “rules-based international order.”

Naturally, developing countries feared what impact such policies would have on their protected companies and industries. For example, the TPP would require them to end their preferential treatment of state-owned enterprises in government procurement, something they were reluctant to do. Nevertheless, developing countries were ultimately persuaded to join the pact because of the added benefits they could gain from greater access to the markets of developed countries.

On the other hand, the RCEP is a far more traditional free-trade agreement. It does not share the lofty ambitions of the TPP. It does not concern itself with “behind the border issues,” like the preferential treatment in government procurement. Rather, it simply focuses on reducing and eliminating tariffs. Countries can limit competition wherever they see fit. On the surface, that sort of pact would appear easier to negotiate. But developing countries must carefully consider the terms of such a pact, because they can lock countries into being part of regional supply chains whose ultimate benefits accrue elsewhere. Given that there are thousands of categories and subcategories of goods to consider (not mentioning the fact that many of those are shuttled between countries before they are assembled into a final product), negotiations are bound to be complex.

Impact of RCEP

Still, the RCEP is back on center stage. If successfully concluded, it could change the structure of Asian trade in ways that would put China firmly at the center of commerce in the region. That, some worry, would accrue even more political as well as economic power to China. But given the prevailing sluggish global economy, what matters to most developing countries is reaping the immediate benefits from freer trade. Unsurprisingly, a couple of countries at the APEC summit quickly seconded China’s interest in reviving the RCEP’s negotiations. It is now up to China to make it happen.

At times, it seemed as though the negotiations over the Trans-Pacific Partnership (TPP) would go on interminably. Begun in 2010, the TPP evolved from the four-country Trans-Pacific Strategic Economic Partnership Agreement to encompass twelve Asia-Pacific countries, including the United States. It would eventually take five years for the trade representatives from those countries to hammer out an agreement, the final terms of which were settled on Monday morning.

Over the coming months, much will be said, both for and against, the possible economic and social implications of the TPP as it is debated in the legislatures of its twelve member countries before it can be enacted. But the TPP also carries with it strategic implications—not only for its smaller members, but also for its largest, the United States. American interest in the TPP began during the last year of President George W. Bush’s tenure. But it was the administration of President Barack Obama that moved the TPP to the forefront of U.S. foreign policy in the Asia-Pacific. So important has the TPP become that Obama persuaded his political opponents in the U.S. Congress to award him “fast-track” trade promotion authority, so that American trade representatives could assure their counterparts from other countries that the U.S. legislative body would not tinker with the specific terms of the trade agreement once it was reached.

Strategically, the United States has come to see the TPP as critical to its long-term security in the Asia-Pacific. It helps to ensure that, even with China’s rise, countries around the rim of the Pacific Ocean would have economic incentives to pursue strong relationships with the United States. As that line of thinking goes, the more closely the trade interests of the TPP’s twelve member countries are aligned, the more closely their economies will integrate and, ultimately, the more likely their political outlooks will align. Perhaps unsurprisingly, the United States is also pursuing a trade agreement similar to the TPP with the countries of Europe called the Transatlantic Trade and Investment Partnership or TTIP.

That line of thinking is not lost on either China or Russia. While China chose not to participate in the TPP to avoid more pressure to remove its many trade barriers, it pushed for another (less onerous) trade agreement called the Regional Comprehensive Economic Partnership or RCEP, which did not include the United States. China has also championed its own form of economic integration, called the “One Belt, One Road” initiative (tying together China’s land-based “Silk Road Economic Belt” and sea-based “Maritime Silk Road” efforts). That initiative has sought to knit together the various economies along the ancient Silk Road between China and Europe. Beijing even created the Asian Infrastructure Investment Bank earlier this year, in part, to support the construction of the trade infrastructure needed to facilitate that integration.

For its part, Russia has tried to cobble together the Eurasian Economic Union (EEU) from the countries that were once parts of the Soviet Union. Russia has pursued the economic integration of the former Soviet republics as a way to not only expand its market space, but also strengthen its sphere of influence over them. While most of the former Soviet republics could not ignore the economic potential of the EEU, they have been cautious about their participation in it. Even Kazakhstan, an early supporter of the EEU, has repeatedly stressed that the EEU should remain an economic, rather than a political, grouping. As can be expected, most former Soviet republics are protective of their new-found sovereignty. And so, they are keenly sensitive to any Russian scheme that may absorb them into a reconstituted empire, particularly in light of what has happened to Ukraine’s Crimea and Donetsk provinces.

But lest we are to believe that closer trade and economic ties will inevitably lead to closer political alignment, history provides plenty of examples where that failed to happen. One cannot say that closer economic integration between the European Union and Russia has brought the two to a more closely aligned political outlook. Instead, they have used their respective trade dependencies on one another as weapons against one another in their political clash over Ukraine.

In the Asia-Pacific, one needs to look no further than the experience of China and Japan. In the 1990s, Japanese companies led the multinational charge to set up outsourced factories and develop new markets in China. In 1999 the two countries did $66 billion in bilateral trade. By 2011 that figure climbed to $345 billion. The two economies became increasingly integrated, with China more reliant on Japan for industrial machinery and Japan more reliant on China for consumer goods. But then tensions over the Senkaku Islands, which began in late 2010, boiled over in 2012 and sparked anti-Japanese riots in China. Tensions have run high ever since, cooling their economic relationship. Every year after 2011 trade between the two countries has fallen. Last year their bilateral trade slipped to $309 billion; the trade figures for August 2015 suggest that this year’s total will be lower still (indeed it is on track for a steep decline). Rising costs in China and a stagnant Japanese economy surely contributed too, but they cannot fully explain the drop, given China’s continued, albeit slower, economic growth.

The causal logic that closer trade and economic ties will lead to closer political alignment could be turned on its head. One could argue that it is when political outlooks are aligned that closer economic integration often seems desirable (and also that when political outlooks are in conflict that economic integration often seems dangerous). That is not to say that the TPP is not a worthy accomplishment; it is. But the United States should be wary of relying too heavily on the TPP to ensure its security in the Asia-Pacific. Even if the U.S. Senate ratifies the trade agreement, the United States should continue to actively pursue other strategic initiatives in the region with equal verve.

Overshadowed by the Boston Marathon terrorist attack, military tensions on the Korean peninsula, and possibly Downton Abbey reruns, the Trans-Pacific Partnership (TPP) took a big step forward in April 2013, when Canada assented to Japan’s participation in the partnership’s regional free-trade negotiations. Begun in 2010, the American-led TPP now encompasses a dozen countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. Even more noteworthy is that almost all aspects of international trade, except for labor mobility, are open to some measure of liberalization. If successful, the TPP will rank among the world’s most comprehensive free-trade agreements.

Even so, most consider free-trade negotiations as dull at best, unless of course the outcomes of those negotiations directly impact their lives. Then, such negotiations become vitally important, because they can result in terms that advantage certain industries over others by removing once-protective barriers to competition. For example, should the TPP ultimately lower tariffs on motor vehicles and rice, American automobile unions and Japanese rice farmers may find their industries under increased pressure to improve efficiency and productivity. Sometimes countries join a free-trade arrangement to improve their economic competitiveness. At other times they do so because they feel forced to. Japan’s interest in the TPP reveals elements of both. Japan surely seeks higher economic growth; but it is also concerned that without freer trade its businesses would face even stiffer competition from other Asian countries, such as South Korea, that do have free-trade arrangements with its trading partners.

But free-trade arrangements have other, more political dimensions. Beyond the direct economic benefits of more international trade, its advocates often cite those benefits as valuable to often (but not always) restrain political differences—eschewing conflict for material wellbeing. Certainly that was a major rationale behind the formation of the European Common Market after World War II that eventually became the European Union. An extension of such reasoning is that countries mutually benefiting from trade are more likely to develop similar outlooks and, thus, become potential allies. During the Cold War, American influence on the Asia-Pacific periphery can be said to have been enhanced as a result of the redirection of the region’s trade away from the mainland behemoths of China and the Soviet Union, which had closed themselves off (fearing the corrupting influence of capitalism) and due to the generally open market (and willing consumers) of the United States.

But with the end of the Cold War and China’s rise, the region’s economic interests are reverting to their traditional patterns. And in that light, one can see the TPP as in the American national interest to ensure America’s position and relevance in the Asia-Pacific region. But the TPP is not the region’s only free-trade arrangement in play. ASEAN began such efforts in the early 1990s with a free-trade agreement among its member countries. And today, China, Japan, and South Korea are pursuing a separate a trilateral free-trade agreement. Though not in direct competition with the TPP, such a trilateral arrangement would surely benefit China by opening two big markets to Chinese goods (and thereby reducing its dependence on the American and European markets) and tempering the impact of the TPP. Japan and South Korea also hope to benefit from greater access to China’s market and to ease the competitive pressures from ASEAN-based companies operating under an ASEAN-China free-trade agreement signed in 2002.

Meanwhile, China has promoted trade talks through the Regional Comprehensive Economic Partnership (RCEP), which comprises ASEAN and the six countries that already have free-trade agreements with it, including Australia, China, India, Japan, New Zealand, and South Korea. If concluded, the RCEP would embrace 3.4 billion people and a combined GDP of $21.4 trillion. By comparison, the TTP’s twelve countries would encompass 790 million people and a combined GDP of $27.5 trillion. That is why it was so important for the TPP to include Japan, with its 127 million people and the world’s third largest economy.

The TPP has proceeded at a fairly fast pace. The twelve-country partnership has taken less than three years to reach its present point. In contrast, the three-county North American Free Trade Agreement took eight years to bring to fruition. Indeed, many issues can surface to delay negotiations, even non-economic ones. The free-trade talks among China, Japan, and South Korea recently stalled when Chinese officials delayed the next round of negotiations, nominally citing scheduling conflicts, but more widely seen as a signal of Chinese displeasure over Japan’s handling of a territorial row between the two countries.

International trade and finance are in the process of rearranging themselves. Early in April, China inked an agreement with Australia that allowed each other’s currencies to be directly converted, without the intermediate need for the U.S. dollar. It marks the third such agreement for China and another step away from the U.S. dollar as the medium of international trade. A decline in the international use of the U.S. dollar in trade should not be discounted, since the dollar’s universal usage not only makes it easier for American companies to compete overseas, but also indirectly lowers American interest rates and boosts American economic growth at home. It is another facet in a wider trade competition among countries. While the TPP may compel some segments of American industry to change after their tariff protections are lowered, in the longer run it will hopefully maintain not only America’s economic competitiveness, but also its security interests in the Asia-Pacific.

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